JUDGMENT
The following judgment were handed down.
SLADE L.J. – This is an appeal by a firm now as Arthur Young and formerly knowns as Arthur Young McClelland Moores & Co.,from the order of Vinelott J. made on October 30, 1986. He had before him an appeal from the special Commissioner by way of case stated under section 56 of the Taxes Management Act 1970. The appeal related to an assessment to income-tax made against the firm under Schedule D for the year 1981-82. for this purpose the assessable profit of the firm fell to be calculated by reference to the accounting period 1 May 1979 to 30 April 1980. Briefly, the question at issue was and is whether two sums expended by the firm as contribution to the expenses incurred by two of the partners in moving house at the request of the firm are deductible in ascertaining those profit.
The firm is large and well-known firm of chartered accountants. As at 30 April 1980 it had 95 partners and about 1,400 employees, of whom about half were professionally qualified, it had 15 officer in various parts of England and Scotland. A new office was opened in Southampton is September 1981. By the time of the period with which we are concerned a partners meeting had become a practical impossibility and an executive committee took most of the administrative decision needed for the smooth èrunning of the firm. This committee consisted of an elected chairman, six elected members and one appointed member, the partner and employees were requested to move from one part of the country to another in order to work in a different of the firm, to ensure that the staff were deployed to the firms best advantage, the commissioner decision recorde :
“The practice of moving partner and employee commenced in about the year 1975, within a short period of time it became the accepted policy of the firm that any partner or the employee might be requested to move for the benefit of the firms business. Employees of the firm who were taken into partnership were made aware of the policy at the time of their admission to partnership. Partners of the firm immediately aware of all the details of the policy on becoming partners in the firm. The policy was not a term of the partnership agreement, in an effort to make this policy palatable and acceptable to all members of the firm, the executive committee decided that the firm would make a substantial contribution to the cost of the private removal expenses of each person who was asked to move.”
The contribution was made up of three elements. These elements are set out in the decision but their details do not matter, it is not suggested that the amounts of the contribution were too generous or exceeded the expenses actually incurred by the recipients. The firms policy of requesting partners and employees to move and contributing to their removal costs (“the firms removal policy”) applied equally to partners and employees of whatever grade or seniority. The commissioners found as fact :
“All partners of the firm approved and agreed with the firms removal policy. A partner would not be compelled to move if he request after being requested to do so, but a partner who declined to move be held in less esteem by his colleagues. We were told and we accept that this financial prospect might suffer and he would be looked upon as someone who did not have the best interest of the firm at heart, occasionally partners would refuse to move could not be compelled to do so and, unlike partners, their position is the firm would not be affected prejudicially should they refuse, on the other hand we heard no evidence concerning any instance of a refusal to move by an employee and the acceptance of such a move by an employee was likely to enhance his prospect of promotion within the firm might lead to promotion on the occasion to move.
“The firm accepted that as it was requesting partner and employees to move from their homes for business reason, it would be inequitable to expect them to bear the whole cost of such removals. Indeed the firm realised that unless it before the cost of such removals, was most unlikely that anyone would move.
“The firm bore the cost of such removals only when the request came from the firm. Any partner or employee who wished to move from one office to another for personal reason and was permitted to do so, bore the entire cost removal himself. Equally, partners and employees who moved house whilst continuing to work at the same office bore the entire cost of their removals, occasionally a persons wish to work in a different office according with the wishes of the firm but if the request for such a move any ècontribution from the firm.”
During the relevant accounting period the firm incurred expenditure of Pound 8,568.40 on the relocation expenses of two partners. Of this sum, Pound 5,446.25 was expended in connection with the removal of Mr. Wilson from London of Southampton and Pound 3,122.14 was expended in connection with the removal of Mr. Cooper from Newcastle to Bristol. The issue on the appeal is whether the expenses total line Sterlling Pound 8,568.40 are deductible in ascertaining the firms profits for the relevant year, during the same accounting period the firm paid out Sterlling Pound 15,560 in connection with the moving expenses of employees who moved at the firms request. Significantly, as the firm would submit, the crown accepted that these expenses are deductible in ascertaining the firms profits for the relevant period.
The circumstances in which this expenditure arose are described in details in the commissioner decision. They can be stated quite shortly. at the end of 1979 Mr. Darby, the chairman of the firm and of the executive committee, asked Mr, wilson, who was the living in London, to open a new office for the firm in Southampton and move to Southampton on a permanent basis, on the understanding that the firm would bear his relocation expenses, in due course Mr. Wilson agreed to go. In January 1980 he moved with his wife from London to a new house in Southampton. The commissioner made these findings :
“Mr. Wilson would not have moved from London to Southampton in 1980 had relocation expenses not been borne by the firm. He was financially unable to bear the cost himself and also believed that it would have been unreasonable for the firm to ask him to defray his own removal cost as he gained no immediate personal or financial advantage from the move. His links with Southampton were limited to his stay there as an undergraduate many years before and accordingly on the occasion of the move from London Mr. and Mrs. Wilson had to make a new life for themselves. From a financial point of view, in short was reduced as he lost the London weighting element. Secondly, the prices of houses in Southampton increased less markedly from 1980 onwards than did those in London, thirdly, although the firm paid out total of 5,446 towards his removal costs, such sum did not cover the entire costs substantially more than the amount of the firm disturbance allowance.”
Mr. Coopers move was a long-drawn out affair. In 1976 he was working as a partner in the Newcastle office and lived in a house in Northumberland, in that year he was asked to move to Bristol to become leader of Bristol office of the firm. At that stage he declined to accept a permanent move to Bristol, but agrees to accept secondment to Bristol for two years. He retained his Northumberland house for the time being but in November 1976 purchased a cottage in Wiltshire, from which he commuted to Bristol, returning home to join his wife in Northumberland as often as possible. Subsequently, Mr. Darby again asked Mr. Cooper to accept a permanent move to Bristol. This time he accepted. He sold his house in Northumberland in May 1978, bought a house in Bristol in August 1979, and moved into èit in May 1980. The commissioner found as facts that “Mr. Cooper suffered considerable financial disadvantage as a result of this his move from Newcastle to Bristol” and that “he would not have agreed to move to Bristol had the firm not agreed to contribute to his removal costs.” The commissioner heard oral evidence from Mr. Darby, Mr. Wilson, Mr. Cooper and Mr. Rouse, who was not member of the executive committee and regard himself as a “typical mid-career partner of the firm”. The commissioner accepted evidence of the four partners to the following effect :
“The four partners who gave evidence before us all took the view that the firms removal policy was beneficial to the firm and that it would be unrealistic, unfair and commercially restrictive to expect partner or staff to move in such circumstances if the firm did not pay their expenses. Each witness took the view that no distinction could be drawn between partners and staff in this context and that the object of the firm is implementing and continuing the firms removal policy was to produce a more efficient firm.”
Having made the findings of primary facts to which I have already referred. The commissioner proceeded to make what they described as “the following inferential finding of fact” :
“1. Although it is not provision of the firms partnership agreement that the relocation expenses of partner who are requested to move by the firm shall be paid by the firm, such a state of affairs is established partnership policy of the firm and understood to be so by all the partners of the firm, 2. The relocation expenses of the partner of the firm are paid or borne by the firm if a partner moves at the firms request than at his own wish. 3. Relocation expenses when paid by or on behalf of a partner are paid by the firm only within the limits of what is reasonable in amount. 4. From the point of view of the firm, its policy in requiring expenses is followed entirely for business reason. 5, each partner of the firm concurs in the firms removal policy entirely for business reason. 6. In relation to the purpose of the firms relocation expenditure, the firm had the same motive when paying or bearing partners relocation expenditure and employees relocation expenditure.”
By virtue of section 108 of income and Corporation Taxes Act 1970 (which was the taxing statute in force at material time) tax Schedule D falls to be charged in respect of the annual profits or gain arising or accruing “to any person residing in the United Kingdom from any trade, profession or vocation, whether carried on in the United Kingdom or elsewhere…” Section 109 provides that tax under Schedule D shall be charged under a number of specified cases, of which case II is “tax in respect of any profession or vocation not contained in any other schedule.” section 130, so far as material, provides :
“In computing the amount of the profit or gains to be charged under case I or case II of Schedule D, no sum shall be ducted in respect of-(a) any disbursements or expenses, not being money wholly and exclusively laid out or expended for the purpose of the trade, profession or vocation, (b) any disbursements or expenses of maintenance of the parties, their families or establishments, or any èsums expended for any other domestic or private purposes distinct from the purposes of the trade, profession or vocation…”
“Where a trade or profession is carried on by two or more person jointly, income-tax in respect thereof shall be computed stated jointly, and in one sum, and shall be separate and distinct from any other tax chargeable on those person or any of them, and a joint assessment shall be made in the partnership name.”
The commissioner held that the expenses totaling Pound 8,568.40 reimbursed to Mr. Wilson and Mr. Cooper during the relevant year were “wholly and exclusively laid out or expended for the purposes of the profession” carried on by the partners and were therefore deductible in arriving at the taxable profit of the firm. The commissioner in their decision, under the heading “Conclusions,” having referred to section 130(a) and (b) of the Act of 1970 said;
“… Mr. Wilson agreed to move after Southampton after being requested to do so. He had no personal reason, whether social or financial, for agreeing to do so.”
A little later they said :
“We have little difficulty in comming to the conclusion that Mr. Wilson moved from London to Southampton purely for business reason. He was aware of the firms removal policy. He approved that the policy. He could see that his move to Southampton would be for the benefit of the firm and that it was a sensible professional and commercial decision.”
As regard Mr. Cooper they said :
“We find that in Mr. Cooper case his reason for moving to Bristol were even more emphatically business and than ones than were Mr. Wilsons. In neither case would the partner concerned have agreed to move if the firm had not been willing to underwrite his removal costs and the sole motive, in each partners mind when moving, was that such a move would be sensible and beneficial for the professional and commercial interests of the firm as a whole.”
They then considered the matter from the viewpoint of the firm as a whole saying :
“Turning now to consider the position from the aspect of the firm, it is clear that if the motives of Mr. Wilson and Mr. Cooper were entirely professional and commercial then, so also to an even greater extent, were the motives of the other partners in the firm. We accept the evidence of Mr. Rouse as typical of the motives and benefits of those partners in the firm (such as Mr, rouse) who had not moved at the firms expenses and who had prospect of doing so. There was no scintilla of personal benefit to each of those partners in bearing a proportion of the cost of the removal expenses of Mr. wilson and Mr. Cooper. In the short term each of them suffered financially. They were content however, believing such expenditure to be the ultimate benefit of the firms business.”
The gist of the commissioners ultimate is to be found in the following passage of their decision :
“We therefore hold that whether one looks at the firm as a single entity, as we are asked to do by Mr. Park or as 95 separate entities as suggested by Mr. MacKinlay, there is no duality of purpose in connection with expenditure on the removal expenses of Mr, cooper and Mr. Wilson during the accounting period. The firm incurred such expenditure wholly and exclusively for the purposes of its profession and the motive of each of the partner of the firm (including both Mr. Wilson and Mr. Cooper was similarly circumscribed. But for the fact that Mr. Wilson and Mr. cooper were partners in the firm and committed to èadvancing its interest they would not have moved houses, further, we infer that given a free choice at the moment when each was asked to move, Mr. Wilson would have remained in London and Mr. Cooper without any shadow of doubt, would have remained in Northumberland.”
The question of law posed by the case stated for the opinion of the court-which was answered by Vinelott J. in the negative-was and is whether the commissioner were correct in holding that the expenses for totaling 8,568.40 were “wholly and exclusively laid out or expended for the purposes of the profession” carried on by the partners within the meaning of section 130(a) of the Act of 1970 and therefore deductible in arriving at its taxable profit. Since there is no appeal from the commissioner on a question of fact, the issue on this appeal resolves itself to the question whether this findings of primary fact entitled them to draw the inference that this expenditure was wholly and exclusively incurred for the purposes of the firms profession : compare Mallalieu v. Drummond [1984] 2 A.C. 861, 872, per lord Brightman.
Before the decision of the house of Lords in Mallalieu v. Drummond [1983] 2 A.C. 861 there was a widespread belief that, is ascertaining the purposes of expenditure, the state of mind of the spender was the only relevant factor. Thus in Bentleys, Stokes and Lowless v. Beeson [1952] 33 T.C. 491 Romer L.J. had said, at pp. 503-504 :
“The sole question is whether the expenditure in question was exclusively laid out for the business purposes, that is : What was the motive or object in the mind of the two individuals responsible for the activities in question ?”
In Mallalieu v. Drummond the house of Lords decisively rejected this view of the law. That familiar case concerned the right of a female barister in computing the profit of her profession to deduct the cost of replacing and laundering clothes suitable to be worn under her grown in court appearances. General commissioner found as facts, inter alia, that she had an ample private wardrobe, that she would not have bought disputes items but for the requirements of her profession and that the preservation of warmth and decency was not a consideration which crossed her mind when she bought them, nevertheless they found that, in incurring the expense, she was on the way to chambers or to court and while she was thereafter engaged in her professional activity and on the other occassions when she did not find it desirable that she should change out of her courts clothes. Sitting at first instance, I reversed the commissioners decision and this court upheld my decision, essentially on the same grounds in each case as those subsequently expressed thus by Lords Elwyn-Jones in a dissenting speech in the same case in the house of Lords [1983] 2 A.C. 861, 868 :
“It was in my view not to open to the commissioner in view of their findings of fact as to appellants purposes to include that as in this case the clothing was suitable for private as well as for the professional use, one of herpurposes must have been to spend money on the cothing for her private use. This in may view was to disregrad the evidence which they accepted as to her actual motive and purposes. This they have found was to enable her to carry on her profession other benefits derived from the èexpenditure, namely that the clothing also provided her with warmth and decency, were purely incidental to carrying on of her profession in the compulsory clothing she had to wear.”
However, the majority of the houses of lords took a different view. The ratio of their decision is to be found in the followings passage from the leading speech of Lord Brightman, at p, 875 :
“I return to the question for your Lordships decision whether there was evidence which entitled the commissioner to reach the conclusion that the object of the taxpayer in spending this money was not only to serve the purpose of her professional, but was also serve her private purposes of providing apparel with which to clothe herself. Slade J. felt driven to answer the question in favour of the prayer because he felt constrained by the commissioner finding that, in effect, the only object present in the mind of the taxpayers was the requirement of her profession, the conscious motive of the taxpayer was decisive. The reasoning of the court of Appeal was the same. What was present in the taxpayers mind at the time of the expenditure concluded the case.
“My Lords, I find myself totally unable to accept this narrow approach. Of course Miss Mallalieu thought only of the requirement of her profession when she first bought (as a capital expense) her wardrobe of subdued clothing and, no doubt, as and when she replaced items or sent them to the launders or the cleaners she would, if asked, have repeated that she was maintaining her wardrobe because of those requirement. It is the natural way that anyone incurring such expenditure would think and speak. But she needed clothes to travel to work and clothes to wear at work, and I think it is inescapable that one object, though not a conscious motive, was the provision of the clothing that she needed as a human being. I rejected the notion that the object of a taxpayer is inevitably limited to the particular conscious motive in mind at the movement of expenditure, of course the motive of which the taxpayer is conscious is of a vital significance, but it is not inevitably the only object which the commissioner are entitled to find to exist. In my opinion the commissioners were both to entitled to reach the conclusion that the taxpayer serve the purposes of her profession and also to serve her personal purposes, but I myself would have found it impossible to reach any other conclusion.”
While the house of Lords in Mallalieu v. Drummond accepted that the commissioner will generally “need to look into the taxpayers mind at the moment when the expenditure is made,” they considered that no such inquiry in necessary in “obvious cases which speak for themselves :”see per Lords Brightman at p. 870. They regarded the cases it as inescapable that one object of the expenditure was “the provision of the clothing that [the taxpayer] needed as a human being :” see p. 875. This private and personal advantages given to her by the expenditure could not be treated as a mere identical effect of expenditure wholly and exclusively incurred for the purpose of meeting her personal requirement. In the circumstances their Lordship considered the commissioner not only entitled but bound to èconclude that her object was both to serve the purpose of her profession and also to serve her personal purposes : see p. 875.
Such is my understanding to the ratio of the decision in Mallalieus case. I might add that we were referred to at least three decision in which certain expenses incurred by the individuals were held not deductible for tax purposes. The first was Newsom v. Robertson [1953] Ch. 7, which concerned expenses incurred by a barrister in travelling between his home at Whipsnade and his chambers in Lincolns Inn. The second was Mason v. Tyson [1980] 53 T.C. 333, which related to the expenses incurred by a chartered surveyor in repairing and redecorating a small flat over his business premises. Where he slept from time to time when he had to stay late at work. The third was Hillyer v. Leeke [1976] 51 T.C. 90, which concerned the expenses incurred by a computer engineer in the upkeep of two ordinary civilian suits worn only when he was at work, in the light of Mallalieus case, whatever the motives of the taxpayers, I doubt whether in any of those three cases it would have been open to the commissioner, as a matter of law, to find that the expenditure in question had been incurred solely for business purposes; the nature of the expenditure would have precluded it.
In argument before the commissioner in the present case. Presumably in the light of Mallalieu v. Drummond, a concession was made on behalf of the firm and recorded thus :
“It is common ground in this appeal that a sole trader incurring removal expenses such as those which we have consider in the instant case would not be entitled to claim deduction in respect of them in his trading accounts for tax purposes. It is not necessary for us to stay whether we subscribe fully to this point of view but for present purposes we are content to accept that it will be corrected in most cases. It is hard to imagine a set motive for moving houses was wholly and exclusively for the purposes of his trade, profession or vocation. Being a single indivisible person it is a virtual certainity that his motives will be coloured by reasons other than business ones.”
It appear that before Vinelott J. no formal concession was that a sole trader, incurring removal expenses as those in issue in the present case, would not be entitled to claim deduction in respect of them in his trading accounts for tax purposes, however, it seems that the contrary was only somewhat faintly argued : see for example [1986] 1 W.L.R. 1468, 1472. The judge by inference clearly concluded or assumed that such expenses would not be deductible, without explicit stating reason for this conclusion or assumption. In this court Mr. Park, while again making no formal concession to this effect, appeared again not disposed to argue more than somewhat faintly to the contrary.
Mr. Moses invited us to hold that the expenses incurred by an individual is moving house can never be said to have been incurred “wholly and exclusively” for business purposes. In his submission the very nature of the expenditure, as serving in part to meet a human need of the spender, would oblige the commissioner as a matter of èlaw to hold that it was incurred at least in part for private purposes, I do not think it necessary or desirable for us to state any such unqualified principle about hypothetical cases which are not before us. I am not for my part, prepared to say that no cases could ever arise where such expense incurred by an individual could be deductible. Lord Brightman in Mallalieu v. Drummond [1983] 2 A.C. 861; Templeman J. in Caillebotte v. Quinn [1976] 1 W.L.R. 731, 733 and Goulding J. in Hillyer v. Leeke [1976] 51 T.C. 90, all recognised that there might be exceptional cases where expenditure on clothing could properly be said to have been incurred wholley and exclusively for the purposes of a business, even though the clothing in the question while worn would confer on the wearer the incidental human benefit of warmth and decency. In a decision subsequent to Mallalieu v. Drummond, Nourse J. in Watkis v. Ashford Sparkes and Harward [1985] 1 W.L.R. 994 on rather special facts held, inter alia, that the special commissioner were entitled to conclude that the cost of overnight accommodation for the partners in a solicitors firm at its annual conference was wholly and exclusively incurred for business purposes and that no distinction was to be made between the cost of accommodation and meals. Conceivably in some cases the question whether expenses incurred by an individual in moving house might involve, in Lord Brightmans words, a matter of fact and degree :” see [1983] 2 A.C. 861, 875. Furthermore, distinction might perhaps fall to be drawn between the cost of providing a house and the cost of moving to it.
Nevertheless, I accept that, in the light of Mallalieu v. drummond if not in all cases, at least in most, the commissioner would be bound as a matter of law to hold that, whatever the taxpayers conscious motive, the purpose of expenditure incurred by an individual in moving his belongings from a previous home to a new home must in part have been to serve a private purpose-that is to say the purpose of meeting his human need to have a properly equipped home in which to live, the translation of an actual case to a hypothetical case is not wholly satisfactory process. In the circumstances. However, I am willing to proceed on the same assumption in favour of the crown as did the commissioner and the judge, namely that the expenses in the question in the present case would not have been deductible if incurred by an individual. The judge, proceeding on this assumption, went on to say [1986] 1 W.L.R. 1468, 1474 :
“The question is whether expenditure which would not found have been deductible if incurred by an individual trader is deductible if incurred by partners in pursuance of a policy adopted by all the partners as one calculated to advanced to interest of their firm.”
In the course of dealing with this question, the judge, at pp.
1474-1475, gave a helpful description of the three stages which are effected involved in assessing partnership profit to tax. The accuracy of this description has not been challenged in argument before us and I gratefully adopt it :
“First, the profit of the firm for an appropriate basis period ascertained : What has to be ascertained is the èprofit of the firm and not of the individual partners. That is not, I think, stated anywhere in the income Tax Acts, but it follows necessarily from the fact that there is only one business and not found a number of different business carried on by each of the partners who were partners during the year to which the claim relates-the year of assessment-in one of the many senses of that word : see the proviso of section 26 of the taxes Act 1970. That is the second stage. The tax payable is then calculated according to the circumstance of each partner-that is relief or deduction to which he is entitled and any personal allowance, relief or deduction to which he is entitled and any higher rate of tax for which he is liable. The Acts do not provide for the way in which personal allowances, relief and deduction are to be apportioned between the partnership income and other income. I understand that in practice they are deducted from the share of the partnership income if that was the partner main sources of income, when the tax eligible in respect of each share of the partnership income has been ascertained the total tax payable in calculated Section 152 (formerly rule 10 of the rules applicable to cases I and II of schedule D) provides that the total sums calculated is to be treated as those as one sum… separate and distinct from any other tax chargeable on those person… and joint assessment shall be made in the partnership name,that is the third stage.”
The authorised show clearly that, at least for the purpose of conducting the first of these stages. (1) a partnership is to be treated as an entity seperate from the partners constituting the firm; (2 it is accordingly possible for a partnership to incur an expense which is deductible in ascertaining the firms profits, even though the recipient is one of its own members. Thus, in Heastie v. Veitch and Co. [1934] 18 T.C. 305 the question arose whether rent which a partnership paid to its senior partner for the occupation if paid to an outsider, “that cannot apply where you are dealing with a partnership and where two partners, so to speak, pay and one received.” His decision was reversed by the Court of Appeal [1934] 1 K.B. 535. Romer L. accepted that, in ascertaining the profits of a partnership for tax purposes. It is not permissible to deduct payments made to a partner for “services rendered as a partner.” However, he said, at pp. 546-547 :
“But it is not true that in ascertaining the profits of a partnership no sum paid to one of the partners can ever be deducted. Suppose that two people are carrying on business in partnership as hotel proprietors, and it is necessary for the purpose of carrying on that business, that they should be supplied from time to time with wine, and suppose that one of the partners is carrying on a wholly independent business on his own account in the wine business and supplies wine to the partnership, it would. As it seems to me, be idle to suggest that for the purpose of ascertaining the profits of the hotel you could not deduct the sums paid to the partner who was the wine merchant. The fact that such a deduction would be èpermissible is, 1 think, made clear by rule 10 of the rules applicable to Cases I and II, which says in effect that for the purposes of taxation under Schedule D a partnership is treated as a separate entity from the individual partners composing the firm.”
The application of the same principle rendered impermissible a deduction in Watson and Everitt v. Blunden [1933] 18 T.C. 402. In that case the taxpayer, who was a practicing solicitor, had in partnership with others bought certain property with a view to working and developing it. He was entitled to four-ninths of the profits of the partnership and acted as in solicitor. He claimed that, in computing his profits as a solicitor, four-ninths of the profit costs should be deducted, essentially on the grounds that he was to this extent paying himself. Finally J., and the Court of Appeal, rejected this contention. Romer L.J. said, at p. 410 :
“It really is, if I may say so, too ridiculous to suggest that, for the purposes of assessing the profits of those two firms under Schedule D, you are going to be troubled with the partnership accounts and the rights as between the partners, for the purposes of Schedule D, the two firms are to be treated as separate entities and. So treating them, there is no difficulty at all. Treating here, therefore, the partnership carrying on this co-adventure as one entity, and the solicitor, of course, as he is, as a perfectly distinct entity, there is no trouble.”
In my opinion, as Mr. Park submitted, the two last-mentioned authorities establish or illustrate two propositions. A payment made to a partner for services rendered by him to his firm in his capacity as a partner cannot be treated as an expense in ascertaining the profits of the firm for tax purposes, conversely, however, a payment made to a partner otherwise the for services rendered to the firm in his capacity as a partner, falls to be treated as an expense; whether it passes the “wholly and exclusively” test is another matter, the judge made this comment in regard to Heasties case [1934] 1 K.B. 535 and Watson and Everitts case, 18 T.C. 402, [1986] 1 W.L.R. 1468, 1476 :
“Neither case lends any support to the proposition that in ascertaining the profits of the firm a benefit or advantage conferred on a partner as a partner can be treated as ancillary to the purposes attributed to the firm considered as a seperate entity.”
With this general statement of principle I respectfully agree. However, I do not think the relevant payments made to either of Mr. Wilson and Mr. Cooper can be regarded as payment made to him for services rendered to the partnership in his capacity as a partner. Accordingly, I think they clearly fall to be deducted in ascertaining the profits of the partnership at the first of Vinelott J.s three stages. The question is whether section 130 precludes them from being deductible at the third stage.
The effect of section 130(a) must be to exclude as a deduction the money spent by the firm unless it can establish that such money was spent exclusively for the purposes of its profession as a firm of chartered accountants, as Lord Brightman said in Mallalieu v. Drummond [1983] 2 A.C. 861, 870 :
“The words in the paragraph expended for the purposes of èthe trade, profession or vocation mean in my opinion expended to serve the purposes of the trade, profession or vocation… To ascertain whether the money was expended to serve the purposes of the taxpayers business it is necessary to discover the taxpayers object in making the expenditure.” Thus, unless the taxpayer and the person benefiting from the expenditure be the same person, it is the object of the taxpayer in making the expenditure, rather than that of the beneficiary in receiving it, which has to be ascertained. Ultimately, the issue in the present case must be whether the commissioners findings of primary fact entitled them to draw the inference that the firms object in making the relevant expenditure was wholly and exclusively to serve the purpose of its business. The judge came to the conclusion, at p. 1477 :
“the authorities do not support the proposition that expenditure which in the case of an individual trader would fall to be treated as serving a dual purpose can in the case of a large partnership be treated as expenditure incurred wholly and exclusively for the benefit of the firm as a separate entity, the personal benefit or advantage of an individual partner being treated as a mere incidental effect of the expenditure.”
This, as I read his judgement, was the basis on which he concluded that the commissioners decision was insupportable in law.
I respectfully differ from this view. While the authorities do not lend explicit support to the proposition mentioned by him, I think that none of the cases cited to us rebut it. There appear to have been surprisingly few cases in which the courts have ever been invited to consider the application of the “wholly and exclusively” test in the context of partnership expenditure. No case has been cited to us in which any court higher than that of first instance has considered it since Mallalieu v. Drummond.
In my judgement, the analogy between the case of expenses incurred by a sole trader of which he is the beneficiary and the case of expenses incurred by a partnership, of which one partner is the beneficiary, is a misleading one. Section 130 (a), as I have said, directs attention to the object of the spender, not the recipient. In the first of those two cases it is impossible to differentiate between the objects of the taxpayer qua spender and qua beneficiary; if in part the expenditure served his needs as a human being, then, in the light of Mallalieu v. Drummond, it may be difficult to deny that at least part of the purposes of the spender was to serve that need. In the second case, the position appears to me quite different.
In the second case, where the payer and the beneficiary are not the same, it is clearly possible, in a sense in which it was not possible in Mallalieus case, to evaluate the objects of the payer in incurring the expenditure separately and distinctly from those of the beneficiary. Where the payer is a partnership, whether or not the recipient is one of the partners, I think that, save in a case where the nature of the expenditure speaks for itself, a proper application of section 130(a) requires èthe revenue to ascertain the purpose of the expenditure at least primarily by what was referred to in argument as “the collective purpose” of the partnership in incurring it.
True it is that under the general law a partnership has no legal personality of its own distinct from that of the individual partners who compose it : Rex v. inland Revenue Commissioners, Ex Parte Gibbs [1942] A.C. 402, 413, per Viscount Simon L.C. Nevertheless, in my judgement, the authorities show that, for the purpose of computing the profits of a firm liable to income-tax under case II of Schedule D, even if not for other purposes of the Income Tax Acts, a partnership is regarded as an entity distinct from its members : see for example Heastie v. Veitch and Co. [1934] 1 K.B. 535, Watson and Everitt v. Blunden, 18 T.C. 402 and Padmore v. Commissioners of Inland Revenue [1986] S.T.C. 36, 45, per Peter Gibson J. While the intentions and motives of individual partners may well be relevant in this context, in my judgement section 130 must correspondingly contemplate that ultimately it is the collective purpose of this nationally distinct entity which has to be ascertained.
I would reject the contention put forward to the commissioners on behalf of the Crown that, in carrying out this exercise, the firm should be regarded as 95 entities. An inquiry into the separate minds of 95 partners is not merely impractical but as inappropriate as it would be to look into the separate minds of 95 directors of a company when ascertaining the purpose of corporate expenditure-a fortiori when the right to make administrative decisions has been delegated to a smaller executive body, as in the present case. In the present case there would appear to be no doubt that the collective purpose of the firm in paying the removal expenses of employees totaling 15,560, referred to in the commissioners decision, was wholly and exclusively to promote the professional business carried on by the firm. And the Crown has so accepted, likewise, in my judgement, if one looks at the matter in the absence of authority, the inescapable inference from the commissioners findings of primary fact is that the collective purpose of the firm, in bearing a proportion of the removal costs of Mr. Wilson and Mr. Cooper, was wholly and exclusively to advance its professional interests. This was the inference which the commissioners drew. Was there any authority or principle of law to prevent them from so finding in accordance with their view of the facts ?
In any case where a partnership has made a payment to one of its partners from which he has derived an element of personal benefit and the firm subsequently seeks to claim that the money has been expended wholly and exclusively for the purposes of the partnerships trade or profession, it must be right that the revenue should view the claim with some circumspection and scrutinise it with corresponding care. Particularly if the partnership is a small one and the benefit is of a type which serves needs of the recipient as a human being-for example, for food, clothing or habitation-it may be difficult to resist the èinference that at least part of the collective purpose of the expenditure was to meet that need, in other words that the expenditure was incurred with a dual purpose. As Lord Brightman put it in Mallalieu v. Drummond [1983] 2 A.C. 861, 875 :
“Of course the motive of which the taxpayer is conscious is of vital significance, but it is not inevitably the only object which the commissioners are entitled to find to exist.”
For my part, however, I do not accept the proposition that in such circumstances expenditure can, as a matter of law, never be said to have been incurred wholly and exclusively for the purposes of the trade or profession of the partnership, the decision of this court in Heasitie v. Veitch and Co. [1934 [1 K.B. 535 well illustrates that the mere fact that the recipient partner receives an incidental benefit from the payment in question does not by itself, and as a matter of law, prevent the payment from being deductible by virtue of section 130, if the collective purpose of the partnership in making the payment was wholly and exclusively to advance the partnerships trade or professional interests. As it happened in that case the receipt of rent did not serve the interests of the recipient as a human being. It was not therefore a Mallalieu type of case, however where partnership expenditure is in question, I can see no difference in principle between those payments made by a partnership to a partner, otherwise than for services to the partnership, which serve in part to meet his human needs and those which do not. I repeat that, in my judgement it is the collective purpose of the partnership as a whole which has to be ascertained. I see no reason why in principle a payment by a partnership to a partner, which happens to meet in part the human needs of the recipient should necessarily fall foul of section 130, while other payments which confer on him incidental benefits of a different nature are not necessarily similarly disqualified from deduction in computing the partnerships profits. Everything must turn on a fair and proper assessment of the partnerships collective purpose in making the payment, if it serves in part to meet a human need of the recipient, that will merely be one factor, albeit an important one, for the revenue to take into account in carefully scrutinising the partnerships collective purpose or purposes. The situation is, in my view, quite different from that where an individual trader makes a payment which serves to meet such a need of his own, in such a case it is the very same entity who makes and receives the payment : as the decision in Mallalieu v. Drummond demonstrates, it is impossible to disregard the human benefit which he has received as recipient in ascribing to him, as payer, purposes in making the payment.
The commissioners very careful decision can perhaps be fairly criticised on a ground forcefully submitted by Mr, moses, namely that, though they referred in passing to the decision of the House of Lords in Mallalieu v. Drummond they did not sufficiently analyse the possible impact of èthat decision on the problem before them, perhaps because it was not specifically put to them, they did not specifically deal with the point forcefully advanced by Mr. Moses in the forefront of his argument before us-namely that, in the light of Mallalieu v. drummond the very nature of the relevant expenditure in the present case precluded the commissioners as a matter of law from finding, as they did, that the relevant expense had been incurred by the firm wholly and exclusively for the purpose of its profession. For the reasons which I have already stated, however, I do not think that this submission was well founded, as the judge correctly stated, as p. 1474 :
“If a personal benefit or advantage conferred by expenditure for which a deduction is claimed can fairly be considered either as a purpose of the expenditure or an an incidental effect of expenditure incurred solely for a business or professional purpose it is for the commissioners to determine what was the purpose of the expenditure.”
In my judgement, as Mr, park submitted, this proposition covers this case and the judge, with all respect to him, erred in interfering with the commissioners decision. Having regard to their findings of primary fact, on the rather special facts of this case, they were in my opinion well entitled, after a close scrutiny of the facts, to draw the inference that the relevant expense had been incurred wholly and exclusively for the purposes of the firms profession and to regard the benefits received by Mr. Wilson and Mr. Cooper as merely incidental to the achievement of those purposes. The so-called benefits, it might be added, consisted of no more than a partial indemnity against some of the costs of moves of house which they did not wish to make.
I would allow this appeal. I would set aside the order of Vinelott J. and affirm the determination of the special commissioners.
BALCOMBE L.J. I have had the advantage of reading in draft the judgement of Slade L.J. and, for the reasons which he there gives, I, too, would allow this appeal, however, for my part, I would wish to keep open for argument, in a case in which it arises directly, the question whether there could be circumstances in which removal expenses of the kind in issue in the present case would be deductible if incurred by an individual. Notwithstanding the concession made by the firm befor the special commissioners-a concession about which, I note, the commissioners expressed some hesitation-it seems to me that there may be circumstances in which it may be possible to establish that the costs of moving house may be deductible when it can be proved that the move took place only to serve the purposes of a trade, profession or vocation. While I accept that the provision of clothing, food and drink and habitation must always, in part at least, be simply to serve a human need, it seems to me that it may be possible, in appropriate circumstances, to distinguish the cost of moving house from the cost of providing a house.
STOCKER L.J. I also agree that this appeal should be allowed for the reasons given in the judgements of Slade and Balcombe L.J. which I have had the benefit of reading. èFor my part, I share the reservations of Balcombe L.J. with regard to the position of an individual carrying on his trade or profession on his own. Having regard to the conclusions of my Lords, with which I agree, on the basis of the collective purpose of the partnership, it is unnecessary to express any concluded view with regard to the position of individual traders.
Appeal allowed with costs.
Leave to appeal on terms as to firms costs.
Solicitors : McKenna and Co.; Solicitor of Inland Revenue.
[Reported by MRS. HARRIET DUTTON, Barrister-at-Law]